'Multiple Dividends with Climate Change Policies: Evidence from an Argentinean CGE Model'

Given the international commitments concerning Climate Change, we evaluate the costs and the potential multiple dividends of applying a carbon tax and/or an environmentally oriented trade policy (EGA) as part of an Environmental Tax Reform (ETR) in Argentina. Reviewing the literature concerning the conditions under which multiple dividends of an ETR can emerge, and also comparing the dividends and costs of implementing alternative ETRs in Argentina using computable general equilibrium model simulations, we conclude that given the structural socio-economic characteristics of developing countries (i.e. persistent unemployment, uneven income distribution, recurrent external and fiscal imbalances, high capital volatility, among others), the implementation of an ETR could be more expensive than for countries without these constraints. For instance, an ETR that leads to an increase in the unemployment rate would easily become impracticable. Results highlight that multiple dividends could emerge when a carbon tax helps to reduce distortionary taxes on labour. Unemployment due to fixed real wages and low capital mobility across sectors and countries allow for this multiple-dividend result. Moreover, when this first best choice of ETR is not applicable, an EGA could also lead to multiple dividends under the same labour market conditions, but with greater capital mobility across sectors and the possibility to import a greener production technology. However, the latter could exert a high pressure on the external balance when implementing a foreign technology. Designing an ETR for developing countries requires this cost-dividend analysis since results seem to be highly sensitive to factors market conditions and the available technology.